Business context and reporting period
Southern California Edison Company (SCE), a wholly owned subsidiary of Edison International, is a regulated electric utility serving Southern California. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods. SCE notes interim results are not necessarily indicative of full-year results.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2.651 billion | $2.446 billion | $5.063 billion | $4.678 billion |
| Operating income | $430 million | $443 million | $827 million | $884 million |
| Net income | $214 million | $226 million | $414 million | $462 million |
| Net income available for common stock | $191 million | $211 million | $373 million | $433 million |
| Operating margin | 16.2% | 18.1% | 16.3% | 18.9% |
Revenue increased, but earnings declined. Management attributed lower core earnings, down $20 million for the quarter and $60 million year to date, mainly to the delayed 2012 CPUC General Rate Case (GRC) decision: depreciation and net interest costs rose before corresponding rate recovery. Revenue growth also reflected SCE taking over power supply previously provided through expired California Department of Water Resources contracts; a rate decrease partly offset this increase. Earnings are not expected to be affected by retail sales-volume changes under the decoupling mechanism.
For the six months, operating cash flow was $1.511 billion, compared with $1.385 billion in 2011; capital expenditures were $2.125 billion versus $2.019 billion. Investing cash use was $2.239 billion, financing provided $712 million, and cash declined $16 million to $41 million. At June 30, total debt was approximately $9.127 billion, comprising $300 million short-term and $8.827 billion long-term, versus approximately $8.850 billion at year-end 2011. The current ratio was approximately 0.90. The new $2.75 billion revolving credit facility had $2.387 billion available; SCE reported a 0.46 debt-to-total-capitalization ratio against a covenant limit of 0.65.
Total assets were $42.003 billion and total equity $10.816 billion at June 30. SCE issued $400 million of 4.05% mortgage bonds due 2042 and raised $805 million net from preference-stock issuance during the first half. Common dividends paid to Edison International were $233 million. The six-month effective tax rate was 33.4%, down from 35.2%.
Material changes, outlook and key risks
- San Onofre outage: Both units remained offline during inspections and testing after Unit 3 tube leakage and unexpected tube wear were identified. Restart timing was undetermined and required NRC approval; Unit 2 might restart earlier at reduced output, while Unit 3 was less likely to return that year. Replacement-power costs through June 30 were about $117 million net of avoided nuclear fuel costs, subject to CPUC reasonableness review. Further total market-power and repair costs could not be estimated. SCE reported $48 million of incremental inspection and repair costs year to date and estimated about $25 million more for a potential Unit 2 restart at reduced power, with no assurance that restart would occur. Possible recovery from the steam-generator supplier and insurance was uncertain; contractual supplier liability was generally capped at $137 million, subject to exceptions.
- Rate and cost-of-capital proceedings: SCE requested a 2012 base-rate revenue requirement of $6.3 billion; intervenors sought substantially less. A decision was expected in the second half of 2012, and the adopted revenue requirement would be retroactive to January 1, 2012. SCE’s 2013 cost-of-capital application proposed a $128 million revenue-requirement reduction, including a lower authorized common-equity return of 11.1% from 11.5%; the proceeding remained pending.
- Capital spending: SCE expected 2012 capital expenditures to be at or below the lower end of its prior $4.4–$5.0 billion range, citing the delayed GRC, Tehachapi project delays and San Onofre issues. Its 2012–2014 capital expenditure outlook remained $11.8–$13.2 billion. The Tehachapi project’s affected construction remained deferred pending further CPUC review; undergrounding options could add cost and delay.
- Regulatory and operating exposures: San Onofre outages could trigger CPUC review of revenue recovery after nine consecutive months offline. Other matters include proposed penalties of about $50 million for SCE in the Malibu wildfire investigation, unresolved San Gabriel Valley windstorm allegations, and Four Corners environmental litigation. Environmental remediation liabilities were $46 million; reasonably possible costs could exceed recorded amounts by up to $222 million. Wildfire, nuclear-insurance, spent-fuel, environmental, tax and regulatory matters remain risks; outcomes and exposures may be uncertain.
- Management outlook and risk factors: SCE expected to fund 2012 obligations, capital expenditures and dividends with operating cash flow and debt or preference-equity financing as needed, supported by its credit facility. Management cautioned that timely customer cost recovery, regulatory decisions, power-market prices and availability, plant reliability, collateral needs, financing access, environmental rules and legal proceedings could affect results and liquidity.
Important facts for investors to verify
- Progress, repair requirements and NRC approval conditions for returning San Onofre Units 2 and 3 to service, including replacement-power costs and possible insurance or supplier recoveries.
- The final CPUC GRC decision, its retroactive revenue effects, and whether the proposed 2013 cost-of-capital changes are adopted.
- Actual capital expenditure levels and the schedule, scope and cost implications of the Tehachapi project review.
- Cash-flow and financing needs, including debt levels, credit-facility availability, collateral requirements and dividend capacity.
- Developments in wildfire, windstorm, Malibu, Four Corners, environmental-remediation and tax matters, including potential penalties or changes in customer cost recovery.